State Street Global: Institutional investors' risk appetite significantly decreased in February, resulting in outflows from US equities and increased allocations to European equities.

State Street Global Markets released its February institutional investor indicators. The State Street institutional investor risk appetite indicator fell to 0 in February, while the State Street institutional investor position indicator showed that institutional investors reduced their stock allocation significantly, falling from its highest level in nearly 16.5 years. Cash holdings were the main beneficiaries of institutional investors' retreat from stocks, rising nearly 0.5% in the month; fixed income holdings were largely unchanged. Michael Metcalfe, global macro strategist at State Street Global Markets, said the sudden end of institutional investors' risk appetite behaviour for the fourth consecutive month in February was due to the release of US economic data that raised concerns about a sudden slowdown in economic growth, offsetting expectations of more stimulus from China. But the way and the area in which investor sentiment changed may be more instructive than the change itself. Institutional investors' holdings of stocks relative to fixed income have been extremely unbalanced in recent months. But when investors sold stocks in February, the main beneficiaries were cash, not fixed income. Thus, while investors were eager to reduce risk and adjust their overall stock holdings to near-average benchmarks, they remained cautious in fixed income. Given the high concentration of institutional investors' holdings in stocks and foreign exchange, it is not surprising that there were significant regional differences in the return to the benchmark in February. Investors' holdings of US stocks, especially technology, were most affected by the adjustment, with overweights falling sharply. Metcalfe said European stocks were the main beneficiaries of the outflows from US stocks, with institutional investors now fully reversing their underweight positions in European equities. In contrast, sentiment in emerging markets improved, but like fixed income allocations, it remained slightly cautious; the only exception was Chinese stocks, which continued to attract inflows. The indicators showed that institutional investors no longer reduced their positions in Chinese stocks.